Cost Formulas Single and Multiple Activity Drivers Coefficie

Cost Formulas, Single and Multiple Activity Drivers, Coefficient of Correlation Kimball Company has developed the following cost formulas: Material usage: Ym$77X;r0.94 Labor usage (direct): Y: $22x; r = 0.94 Overhead activity: Yo = $346,000 + $97x; r-0.77 Selling activity: Ys = $51,000 + $11x; r= 0.93 where X = Direct labor hours The company has a policy of producing on demand and keeps very little, If any, finished goods inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for production The president of Kimball Company has recently implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. This policy was implemented because Kimball\'s industry is in a recession and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that minimally cover their variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Required: 1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an order for 20,000 units at $217 per unit.

Solution

1. The total variable cost is

Direct material: ym= $77X,. 77*20000 = 1540000

Direct labour :. Y1= 22X,. 22*20000 = 440000

Overhead: 346,000+ 97X, here 346000 is a fixed coat has it doesn\'t depend on units manufacrured

Variable overhead cost : 97* 20000 = 1940000

Selling variable overhead : 11X, 11* 20000 = 220000

Total variable cost: 4140000/20000 = 207